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Dissenting Statement at Open Meeting Regarding Final Rule on Credit Risk Retention

Commissioner Michael S. Piwowar

Oct. 22, 2014

Thank you, Chair White.

Let me begin by saying how much I appreciate the great efforts from the Commission staff working on the rule, especially those in the Divisions of Corporation Finance and Economic and Risk Analysis and the Office of General Counsel.  Unfortunately, despite their efforts, I cannot support the adoption of the final joint rule to implement the credit risk retention requirements of Section 15G of the Securities Exchange Act of 1934 (the “Exchange Act”),[1] as added by Section 941(b) of the Dodd-Frank Act.[2]

As a joint rule promulgated under the authority of the Exchange Act, such rulemaking must comply with the requirements of Section 23(a)(2) of the Exchange Act to consider the impact on competition[3] as well as Section 3(f) of the Exchange Act, which requires, when determining whether an action is necessary or appropriate in the public interest, consideration of whether the action will promote efficiency, competition, and capital formation, in addition to the protection of investors.[4]

Today’s adopting release includes a section entitled “Commission Economic Analysis” that discusses the considerations of our own economists with respect to the joint rule.  Glaringly absent, however, is an economic analysis from any of the other rulemaking agencies – the Office of the Comptroller of the Currency, the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation and, in the case of residential mortgage securitizations, the Department of Housing and Urban Development and the Federal Housing Finance Agency.  The lack of any such efforts is particularly troubling given the significant number of discretionary choices made in promulgating the final rule.[5]  Most importantly, the Commission’s economists did not prepare a specific economic analysis addressing the scope of the underwriting exemptions for qualified mortgages and other assets from the risk retention requirements, since those provisions were to be adopted by the banking regulators alone.[6]

Last December, when the Commission considered another joint rulemaking regarding prohibitions on proprietary trading and certain relationships with private funds – Section 619 of the Dodd-Frank Act, more commonly known as the Volcker Rule – I was advised that economic analysis was not required because that rule was being promulgated under Section 13 of the Bank Holding Company Act, which does not require economic analysis.  Today, however, we are promulgating a joint rulemaking under the authority of the Exchange Act, which contains certain explicit requirements.  The rulemaking agencies thus have a duty to comply with the requirements under that act, a duty they have failed to perform.

The failure of the other rulemaking agencies to expressly adopt an economic analysis is all the more important given the broader economic concerns that the joint rule raises.  The Commission’s economic analysis observes that the intended benefits of securitization include reduced cost of, and expanded access to, credit for borrowers, ability to match risk profiles for specific investor demands, and increased secondary market liquidity.[7]  Yet, the Commission’s economic analysis notes that mandatory risk retention could impose significant costs on the financial markets.[8]  These costs are likely to be passed on to borrowers, either in terms of increased borrowing costs or loss of access to credit, and thus will cut directly against the intended benefits of securitization.

The Commission’s economic analysis also indicates that if risk retention is too low, it may not adequately align the incentives of investors and sponsors.[9]  On the other hand, an excessive level of risk retention may lead to less availability of capital, increased borrowing rates, and a more limited supply of credit.[10]  Despite the clear need to appropriately calibrate the level of risk retention in order to avoid significant unintended consequences, the staff states that it has not determined an optimal level of retained risk and yet the agencies are adopting the imprecise and arbitrary statutory risk retention level of five percent.[11]  It is most unfortunate that, rather than choosing to pursue an informed course of action to determine optimal levels of risk retention – which certainly differ among asset classes with different risk profiles – banking and housing regulators have decided to throw up their hands and simply decide that getting it done is more important than getting it right.  For instance, the final release is dismissive of the alternatives identified by commenters in the context of open market collateralized loan obligations.

More broadly, I remain concerned about the continued dominant role in housing finance played by the two government-sponsored enterprises (GSEs) that required the largest taxpayer-funded bailouts in history – the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).  According to the most recently posted conservator’s report, these two GSEs account for 78% of all residential mortgage backed securities issuances and, when combined with Ginnie Mae issuances, total nearly 100% of the market.[12]  These GSEs currently have a competitive advantage over private securitizations due to lower funding costs as a result of an explicit federal guarantee.[13]  One result of the dominance and competitive advantages of the GSEs has been the crowding out of the private sector in housing finance – and let’s not forget that the entire securitization process was a private sector innovation.

I am also troubled by last week’s news – the timing of which was undoubtedly coordinated with this week’s rulemaking – that the Federal Housing Finance Agency is pushing Fannie Mae and Freddie Mac to consider programs that would make it easier for borrowers to obtain mortgage loans with down payments as low as three percent.[14]  As prominent housing market scholar Mark Calabria remarked, “[t]hree percent [down payments] can disappear and become zero real quick…This is the sort of thing that gets people underwater.”[15]    

Given the apparent ease with which the majority of this Commission working hand-in-hand with the Administration’s housing market policy makers are willing to further entrench the government in this market and continue to crowd out the private lenders, I have considerable skepticism as to whether taxpayer-backed GSE-sponsored securitizations will ever be subject to the risk retention requirements and be forced to operate on the same level playing field as private securitizations.[16]

Thank you and I have no questions.

[1] 15 U.S.C. Sec. 78o-11.

[2] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (“Dodd-Frank Act”).

[3] 15 U.S.C. Sec. 78w(a)(2).

[4] 15 U.S.C. Sec. 78c(f).

[5] See Commissioner Michael S. Piwowar, Statement Regarding Joint Rule Reproposal Concerning Credit Risk Retention (Aug. 28, 2013).

[6] Credit Risk Retention, Exchange Act Release No. 73407 (Oct. 22, 2014), at 548 n. 476 (“Adopting Release”).

[7] Adopting Release at 429-30 (citing Board of Governors of the Federal Reserve System, Report to the Congress on Risk Retention (Oct. 2010), and Financial Stability Oversight Committee, Macroeconomic Effects of Risk Retention Requirements (Jan. 2011)).

[8] Adopting Release at 438-40.

[9] Adopting Release at 467-68.

[10] Id.

[11] Id.

[12] Federal Housing Finance Agency, Conservator’s Report on the Enterprises’ Financial Performance (First Quarter 2013), available at

[13] Adopting Release at 554.

[14] Joe Light, Mortgage Giants Set to Loosen Lending – Fannie, Freddie Near Deal to Lift Limits; Concerns Persist, The Wall Street Journal (Oct. 18, 2014), at A1.

[15] Id.

[16] See also Commissioner Daniel M. Gallagher and Commissioner Michael S. Piwowar, Government Punts on Meaningful Mortgage Standards, The Wall Street Journal (Jun. 26, 2014) (expressing concern that a majority of the Commission intended to surrender the definition of “qualified residential mortgage” to the Bureau of Consumer Financial Protection (CFPB)).  The CFPB is unaccountable to Congress pursuant to the normal appropriations process.  See Section 1017 of the Dodd-Frank Act.

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